There’s Only One Stock-Market Sector in the Green This Year

Energy is one of the two sectors in the S&P 500 in the green for 2022, up 37%. The benchmark itself is down 5.3% with investors worried about the pace of the Federal Reserve’s plan to increase interest rates to curb inflation. Financials are up a modest 1% in 2022.

Of the 25 best-performing stocks in the index this year, 17 sit in the energy sector. Occidental Petroleum Corp. OXY -2.17% has more than doubled, Halliburton Co. HAL -1.30% has surged 62% and Chevron Corp. CVX -0.33% is up 40%.

The gains in the stocks track the climb in oil prices. Brent crude, the international benchmark, has risen 48% this year to $115.48 a barrel and briefly eclipsed $130 earlier this month. U.S. crude is at $111.76.

The rally has also coincided with a decline in the big technology shares that powered the market higher for much of the past decade. Investors have sold shares of tech and other growth companies with lofty valuations, concerned about how they will fare in a rising-rate environment. The S&P 500’s tech sector is down 9.8% this year.

“The new FANG is going to be fuel, agriculture, natural resources and gold,” said Nick Giacoumakis, president and founder of NEIRG Wealth Management, referring to the popular acronym for Facebook, Amazon.com Inc. , Netflix Inc. and Google. 

The ripple effects from higher energy prices and concerns about potential shortages have lifted prices for many commodities to records. Wheat prices recently hit new highs, as did prices for metals such as palladium, nickel, aluminum and copper.

Mr. Giacoumakis said his firm is invested in energy through equities and exchange-traded funds; he estimates oil will trade above $120 a barrel during 2022. 

To be sure, the energy sector’s influence on the broader stock market is limited, even after the recent rally. The group’s weighting in the S&P 500 is 3.9%, down from more than 15% at its peak in 2008 before demand for oil and gas started diminishing and technology emerged as the economy’s dominant industry. 

Excess drilling by shale producers and sliding energy prices prompted many investors to trim their positions in energy stocks years ago. A wave of climate-conscious investing further added to the pain. Money managers shunned fossil-fuel producers, while adding green-energy companies to their portfolios. The Covid-19 pandemic delivered another blow when demand for energy evaporated during the shutdown.   

The tide began to turn last year as the economy recovered and oil producers kept supply in check. Energy was the best-performing sector in the S&P 500 last year after lagging behind the index in eight of 10 years through 2021. 

Linda Duessel, senior equity strategist at Federated Hermes, said her firm has been overweight energy stocks since the third quarter of 2020, betting that oil prices would rebound with the economy. Still, she said she didn’t expect Brent crude prices to top $130 a barrel and estimates that oil will trade around $100 once traders have fully digested the supply shocks from the Russian sanctions. 

“That’s too far too fast,” she said of the rise in oil prices. 

The energy sector has been through boom-and-bust cycles in the past. If oil prices climb too high, consumers are likely to adjust their habits, lowering demand for energy and sending prices tumbling once again.

As the broader stock market struggles, many investors are turning to energy stocks for their outsize returns. The sector offers a 2.9% dividend yield, versus the 1.3% offered by the S&P 500 as a whole and the 2.375% yield on the benchmark 10-year Treasury note.

Energy companies have also resumed buying back their own shares at a brisk pace after that activity ground to a halt in 2020. Buybacks in the sector nearly tripled last year, according to S&P Dow Jones Indices, outpacing the S&P 500’s 70% increase.

Exxon XOM -0.44% Mobil Corp., for one, unveiled plans in October to resume buybacks after a five-year hiatus, authorizing a $10 billion share repurchase. Exxon shares have climbed 34% so far this year.

Repurchases can support stocks by reducing a company’s share count, boosting its per-share profits. And they can boost investor sentiment by suggesting executives are optimistic about their companies’ prospects and confident in their financial position.

Investors rushed into energy-focused commodity mutual funds and exchange-traded funds for the sixth consecutive week in the period ended March 16, according to data from Refinitiv Lipper. That marks the longest streak since a 11-week run that ended in May 2020. Investors also poured $1 billion into energy equity funds in a single week earlier this month, the largest inflows in a year.

Those who have bet against energy stocks haven’t fared well. Short sellers have lost $13.7 billion in the energy sector this year, according to technology and data analytics company S3 Partners, and have rushed to cover some of their exposure. Short sellers borrow company shares and then sell them in hopes of buying the stocks back at a lower price in the future.

A diplomatic resolution between Russia and Ukraine or the removal of sanctions on Iran oil could increase supply and send oil prices tumbling again. For now, investors continue to monitor the supply risks and remain cautiously bullish on energy.

“Quite honestly unless somebody can predict how the future is going to play out—in terms of Russia and Ukraine, or we’re looking toward some kind of resolution in the near future—I can’t say I expect commodities to stop climbing,” said Oktay Kavrak, product strategist at Leverage Shares.

Write to Hardika Singh at [email protected]